Severstal, one of the world’s leading vertically integrated steel and steel-related mining companies, announced its operational results for Q2 & H1 2016.
Hot metal output decreased by 6% QoQ to 2.21 million tons (2.35 million tons in Q1) mainly impacted by short-term maintenance of BF No. 5 at Cherepovets Steel Mill (CherMK) during the quarter.
Reflecting abovementioned maintenance as well as scheduled short-term maintenance of continuous casters No. 3 and the billet caster, crude steel production declined by 3% QoQ to 2.81 million tons (2.91 million tons). Meanwhile, seasonal demand growth underpinned improved production run rates at the Balakovo mini-mill, which partially mitigated the negative impact of the maintenance works.
Despite a decline in crude steel output, consolidated sales of steel products increased by 14% QoQ to 2.79 million tons (2.45 million). This reflects higher domestic steel consumption on the back of seasonal factors as well as improved activity by local traders anticipating RUB-denominated domestic steel price increases. This resulted in a substantial inventory reduction by the company during the period.
The seasonal improvement in domestic steel consumption enabled the company to swiftly relocate volumes from export destinations to the local markets given the proximity of the main producing assets to the border, resulting in the share of domestic steel products sales volumes in the sales mix increasing to 64% (60%).
The company completed the refurbishment of the four-stand cold rolling mill at CherMK in May. This will increase mill capacity to 200,000 tons per annum and significantly improve product quality, enabling the company to expand its product line and enter new markets.
The four-stand cold rolling mill was in ramp-up mode in June. Despite this, the share of high value-added (HVA) products in the sales portfolio increased to 43% (42%) reflecting robust demand in the domestic market.
The company continues to monitor methane gas concentration levels at Severnaya mine in order to identify further steps in the recovery process. Operations at the mine remain suspended with the flooding process having been completed in May. Among the potential options to be considered by the company is mining the Severnaya coal reserves via an adjacent Komsomolskaya mine. All of Vorkutaugol’s other four mines and one open pit are operating as usual. The company will provide further updates as soon as information becomes available.
The domestic market, which typically offers higher sales margins, remains the priority focus for the company. Nevertheless, it foresees normalization of domestic market premiums towards the end of the construction season.
Coking coal concentrate sales at Vorkutaugol decreased by 21% QoQ to 1.08 million tons (1.36 million tons). Internal coking coal concentrate procurement remained largely unchanged. In the meantime and as anticipated, external sales volumes compressed by more than 50% QoQ.
Steam coal sales at Vorkutaugol decreased by 34% QoQ on the back of much lower domestic consumption by the end of the heating season.
The improved economics of the iron ore business resulted in a decision to restart iron ore concentrate external shipments at Olcon. This was a key factor behind the 18% QoQ increase in sales volumes. Moreover, Severstal also increased iron ore concentrate inventories at CherMK.
While internal procurement of iron ore pellets decreased marginally, the seasonal sharp improvement in demand in export markets resulted in an 18% QoQ increase in iron ore pellets sales to 2.85 million tons (2.41 million tons).
Severstal Russian Steel (RSD) steel product sales increased by 14% QoQ to 2.80 million tons due to a robust increase in both domestic final steel demand and improved traders’ activity. The company released its steel inventories, previously stockpiled prior to the construction season. The proximity of key assets to the border also facilitated shifting to domestic deliveries with the share of export sales within the sales-mix decreasing to 36% in Q2 (40% in Q1).
Given the higher demand in the domestic market, sales volumes of cold-rolled coil, galvanized and metallic coated coil and color-coated coil went up by 14%, 39% and 41% QoQ respectively. This is partially because of the low base due to the scheduled upgrade of the four-stand cold rolling mill in January-May, which has already resulted in even higher rerolling capacities.
Taking into account the above factors the share of HVA products within the sales mix improved marginally to 43% (42%), despite a 9% QoQ increase in hot-rolled coil sales volumes. Long product sales volumes increased by 19% QoQ following the Balakovo mini-mill production ramp-up due to improved domestic demand.
Large diameter pipes (LDP) sales volumes remained largely unchanged QoQ. In Q2 2016 Izhora Pipe Mill continued supplying LDPs for the Gazprom maintenance projects. Meanwhile, Severstal began supplying LDPs for the Power of Siberia and Ukhta-Torzhok-2 projects.
To recap, March marked positive developments in the global steel markets with steel prices globally improving sharply. In the domestic market, Russian steel companies managed to successfully command several rounds of RUB-denominated price increases in order to catch up with export USD-denominated prices. Severstal’s average selling prices achieved an increase of 14-57% QoQ depending on specific product. (Severstal/Ukrainian metal)